Cocoa prices ease on ample supply, sinking futures

by Ron Sterk
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After holding at or near historic levels for most of the year, cocoa powder prices have eased the past few weeks and more weakness may be on the way amid ample supplies and mixed demand signals. Meanwhile, cocoa bean futures prices have been trading at multi-year lows in New York and London.
In early March of this year nearby cocoa bean futures prices hit 32-year highs above $3,800 a tonne in New York. Last week the nearby March 2012 contract was trading below $2,300 a tonne, down 15% in November, down nearly 40% from the high and at 2½-year lows. Cocoa bean futures prices in London were at 3-year lows.

Adding to the bearish scenario in New York, recent changes to cocoa bean delivery specifications made some U.S. cocoa bean stocks undeliverable against the March 2012 and later contracts, forcing traders to either liquidate December positions or to make delivery against the December contract, which sent nearby futures prices tumbling.

About this time last year political conditions in the world’s largest cocoa bean grower, Ivory Coast, were deteriorating into a violent morass that resulted in an export ban during the first quarter of 2011 that temporarily tightened global supplies. But as the newly-elected president took control in the Ivory Coast, exports resumed quickly as cocoa product and bean exports were the major source of revenue for the nation. Ivory Coast cocoa bean production was record high in 2010-11 despite the export ban that resulted in increased smuggling through neighboring countries.

Global 2010-11 (October-September) cocoa bean pro-duction was estimated by the International Cocoa Organization at 4.25 million tonnes, up 1% from the prior forecast and up 17% from 2009-10, with a surplus of 341,000 tonnes (up 5% from its prior forecast). Global cocoa bean grindings for 2010-11 were estimated at 3.867 million tonnes, up 4% from 2009-10.

In September the market received a bullish demand signal with an unexpected 14% increase and record high in third-quarter cocoa bean grindings in Europe, the world’s largest chocolate consuming region, and a strong 3.4% increase in North America.

But since then a shaky economic situation has con-tributed to demand uncertainty in Europe and the beginning of the 2011-12 main crop cocoa bean harvest Oct. 1 in the Ivory Coast and other West Africa nations has added to already ample global supplies. Cocoa bean futures prices have tumbled amid considerable volatility, but cocoa powder prices have held firm, until recently.

As a result, prices for basic 10% to 12% natural cocoa powder prices in mid-November were down about 20c a lb, or 8%, since September, although values still were historically high and modestly above year-ago levels. Further weakness was indicated last week, pulling prices for natural cocoa powder about even with year-ago values.

The biggest puzzle remains on the demand side of cocoa and chocolate. While some major processors are sold out of cocoa powder for much of the first half of 2012, others have reported requests for delayed delivery of previously contracted material or have seen a slower-than-expected drawdown of contracted supply, indicating weakness in demand. In the past couple of weeks even larger processors were said to have become more aggressive sellers, dropping offering prices for 2012 in some cases. Such weakness has been attributed to a combination of economic uncertainty and earlier substitution of cocoa to the extent possible that has had a longer-term effect of reducing powder usage somewhat.

Ideas are that most major confectioners have cocoa needs well covered at least through mid-2012, while bakers and mix makers likely have less coverage. The real market test will be seen in February-March, one trader noted, when users get serious about covering last-half 2012 powder needs and the market has a better idea of pending global supply with the completion of main crop bean harvests in West Africa.
At the same time, cocoa butter ratios recently dipped to record lows against London cocoa bean futures prices as supplies of butter, used in higher grades of chocolate, remain ample globally.

The drop in cocoa powder values has been reflected in the Sosland milk chocolate bar index, which stood near 206 points in late November, down about 5% from the April high of 225.5 but still 4% above 206 a year ago, compared with the 2005 base of 100 points.

Cocoa bean production in 2011-12 has been forecast by various analysts to be down slightly from 2010-11, but earlier forecasts for a deficit generally have melded into ideas of a slight surplus in cocoa bean supply and a slowdown in global grindings, which would further indicate continued price weakness.

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